Opinion: This plan to tax the ultrarich is much simpler and better than Biden’s idea

President Joe Biden and Senate Finance Committee Chair Ron Wyden (D-OR) have proposed different ways to tax unrealized capital gains each year. Its shared goal is understandable, with billions of dollars escaping income tax under current law. But each plan raises serious administrative and legal issues.

We suggest a simpler and more effective approach: taxing the unrealized gains of the rich by dying at a higher rate than if the assets are sold or given away as a gift for life.

An unrealized gain is an increase in the value of an asset, such as shares, that has not yet been sold. Taxing these gains is important because unrealized profits now account for more than half of the impressive amount of wealth of the wealthiest Americans, who have at least $ 100 million in net worth.

The current law encourages the rich to keep their assets until death, when these gains escape the income tax permanently. This happens for two reasons. First, the current law does not treat a legacy as a sale, so no income tax is payable in the event of death. And second, heirs are allowed an “intensified base” where they never pay taxes on any increase in the value of the property during the life of a deceased.

The results: the government loses a massive amount of revenue, wealth inequality is perpetuated across generations, and investors are encouraged to keep (or “block”) unbalanced and less productive portfolios.

More than 50 years ago, two prominent tax experts described not taxing the proceeds of property transferred to death as “the most serious flaw in our federal tax system.”

To fix this long-standing flaw, our plan would tax the unrealized gains on the death of the very rich (couples with more than $ 100 million and singles with more than $ 50 million) on the ordinary income tax rate, currently 37%. But the profits from sales or gift of assets over a lifetime would continue to be taxed at 23.8%. Transfers to spouses would be tax-free. And the very rich would be allowed to deduct their income taxes on the death of their wealth taxes.

Our proposal reverses the existing incentive for valued assets. Instead of encouraging people to keep their assets valued until death to avoid income taxes, our proposal encourages them to sell those assets before they die.

For example, imagine a businessman who owns $ 100 billion of his company’s shares, for which he paid nothing when he founded the business. According to our proposal, if he holds his shares to death, he should owe $ 37 billion in income tax. But if he sells for life, he owes $ 23.8 billion. And if he wants to transfer his shares to his children without paying the $ 37 billion, he could give them his shares for the rest of his life and pay $ 23.8 billion.

To determine the scope of our proposal, Rob reviewed data from the 2019 Consumer Finance Survey, which he combined with information from the Forbes 400 (which is excluded from the survey). He estimated that taxpayers subject to our proposal have unrealized gains totaling about $ 7.5 trillion in 2022.

If these households get $ 6 trillion out of their $ 7.5 trillion of that gain over their lifetime, and the remaining $ 1.5 trillion when they die, our proposal would raise nearly $ 2 trillion over time. Over the next 10 years alone, our plan could raise hundreds of billions of dollars, just like the Biden and Wyden plan. (Our plan could raise more than yours eventually, as our death tax rate is higher than Biden and Wyden’s).

To put it simply, we assumed that unrealized gains do not grow over time, which probably makes our estimates conservative.

Burning the richest households to their unrealized earnings on death is much easier to manage than Biden or Wyden’s plans to tax them annually. Our plan would be based on existing wealth tax returns and valuations, which the rich already file, while Biden and Wyden’s plans would impose new annual returns for taxpayers during their lifetime. While few taxpayers would pay the Biden or Wyden tax, many more would have to value all of their assets annually, as taxpayers close to the line could get in and out of the schemes over time. How would the IRS determine if all of these taxpayers presented themselves correctly?

Finally, our proposal to raise taxes on transfers by donation or legacy is well established in the U.S. Constitution, but collecting taxes off transfers during your lifetime raises unresolved legal issues.

Today, the largest and wealthiest taxpayers often cling to assets valued during their lifetime, waiting to be transferred to death. Our plan encourages them to make a living for life, which could lead to more balanced portfolios, expand ownership of these assets, and generate much-needed tax revenue.

Steven M. Rosenthal and Robert McClelland are senior fellows at the Tax Policy Center, a joint venture between the Urban Institute and the Brookings Institution. This was first posted on the TaxVox blog: “Death Capital Gains Tax at a higher rate than for life.”

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